The Sands of Time

The Sands of Time

Back in 1987, three physicists called Per Bak, Chao Tang and Kurt Weisenfeld wrote a computer program to simulate what happens when  grains of sand are repeatedly dropped onto a table top. They developed it to try to solve the problem as to why sometimes the dropping of one small grain of sand on a pile will cause no effect, sometimes it will create a small avalanche, and sometimes there will be a catastrophic collapse. After much dropping of sand they concluded that there was no pattern to the outcome, sometimes it was negligible, sometimes total collapse ensued, it appeared totally random.

 Next they decided to look at the sand pile from above and show the degree of steepness of the faces by colouring flatter, more stable areas green and steeper more unstable faces red. As the test continued and more grains of sand were dropped, more of the face became red. Starting with small independent areas of red, slowly but surely the area of red increased and linked together forming a matrix over the surface of the pile. Up to this point the dropping of one small grain of sand could only affect small areas of the pile, but once the matrix was complete it had the potential to cause a total collapse. Scientists refer to this situation as a critical state, the point at which there is an opportunity for significant change.

Once this discovery was made, its influence was recognised in a whole range of seemingly random events from ecological disasters to earthquakes, and epidemics to traffic jams.

We also see this slow development of a critical state develop in financial markets.  As markets rally over a long time period they often climb a ‘wall of worry’, meaning that despite an increasing stream of market negative news-flow, investors continue to disregard or put a ‘positive spin’ on things and drive the market higher. At times investor’s ability to ignore reality is a sight to behold, as one by one the positive arguments for the market fall away to be replaced by negatives, they increasingly cling to the remaining bullish arguments until we finally arrive back at that sand-pile, and its critical state. At this point the market has reached an incredibly unstable condition, and any piece of seemingly innocuous bad news can be the grain of sand that causes the market to crash.

Another area where we are currently witnessing this phenomenon is in the increasing civil unrest occurring around the world. Over the last few months we have seen problems occurring in South America, the Middle East, Spain, Turkey, Thailand, Malaysia and most recently Ukraine. In all of these countries the people are rising up to protest at declining living standards, low economic growth, increasing taxation and rampant corruption. These problems have been developing for many years, laying the foundations for the crises we are seeing now. Like the financial ‘wall of worry’, the problems gradually intensify but change can’t happen until the time is right and we reach the critical state, then one more event occurs that breaks the camels back and the civil uprising begins. That is what we are seeing play out around the globe, and as the months roll on we will see it spread like an epidemic.

As I have discussed in previous posts, the financial implications of this will be the increasing flow of money to the last safe haven, the US dollar. Far more concerning will be the human cost as this cycle plays out, and its predictability doesn’t make it any easier to witness.

It’s clear to see that the phenomenon of the critical state is all around us and seems to permeate all aspects of our lives. But whilst its effects can be immensely damaging, knowledge of its existence and prevalence gives us all at least a chance to occasionally see it coming and avoid its outcome.

Cycling around the South Island of New Zealand

I am a trustee of a New Zealand based charity called The Shortbread Trust. Based in Nelson, we work to help people in developing countries by fundraising to build water wells to provide clean drinking water in Nepal, funding micro finance projects to give a helping hand to farmers in Africa, and buying Shelter-boxes to send to disaster zones. We take no administration fee and guarantee that 100% of donations go to the cause. Please see http://www.theshortbreadtrust.com/ for more information.

Currently our Chairman is preparing to cycle around the South Island of New Zealand towing a Shelter-box to raise awareness and as a fundraiser, see https://www.facebook.com/theshortbreadtrust for the full story.

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